Real Economics

Real macroeconomics ought to set its field of study correctly. It’s not nation-states anymore. We are living on a small Earth. Condensing Mercury vapor from burning Chinese coal poisons our food. Facts cognizable by all, such as Assad dropping napalm on a school in Alep (BBC, 8/26/13) devour moral systems, making anti-war weaklings into accomplices of crimes against humanity.

The house in eco (oikos) -nomy is now the entire planet, the full arena of human activity. Such is the macro stage. Nothing smaller will do.

Now that the stage is determined, what’s the “nomy” in eco-nomy about? Nemein is “manage“, related to “mane” (hand). Manage what? People, their work, the entire planet, recently on fire:

Yosemite Rim Fire: Bad Economics At Work

[Energy Unleashed, Men Overwhelmed; 95% of California Visible Above; On Day 5 Of Rim Fire, only 2,000 firemen were fighting it, because another 6,000 professional firemen were employed on other Californian wildfires! Some can be seen above. San Francisco Bay is the gaping grey crocodile jaw full west (left!) of the Rim Fire]

The number one object of economy ought to be energy: what we need, how much of it, to do what, and at which ecological cost. So economics has to be refounded around the idea of energy.

Once one has refounded economy theory around energy, one gets a bonus. One has to remember that well channeled energy does work. So work, that is employment, is a natural attachment to energy focused economics.

Monetary considerations are tied to the fractional reserve system at this point. That’s what conventional economists do. They might as well do the economics of angels on a pinhead.

It’s not that money is purely imaginary, but it’s a convention. If all loans were recalled in all banks, one will find that there has been 30 times more money lent that there was to be lent from what the banks really owned (that’s what 3% reserve in USA banks mean).

Money, as it presently exist, is an artificial construct that exists only thanks to its government back-up. That is, money is backed-up by the established order, its “justice system”, taxmen, police, army. But that order is flimsy when the entire biosphere is wobbling, the forests are burning, and acidifying seas are rising, thanks to human activity.

To just worry about monetary policy is like worrying about a weltering bush because the giant, multimillennial sequoia across the clearing, just caught fire. As has been happening in Yosemite National Park for two weeks.

Think about the Yosemite Rim Fire, burning trees that existed before Rome: if that kind of disaster, a direct consequence of human activity, is not incorporated in economics, the very concept of economics, as used today, is a contradiction with what it was meant to be.

Economics then just becomes a way to employ thousands of sophists singing together about the beauty of the established order. But there is no beauty when the planet is on fire.

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Patrice Ayme

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Notes: 1) The objection above is analogous to the one Socrates made against education and politics in Athens. I propose a remedy, Socrates did not. The remedy to Socrates’ complaint was the rise of democratic meritocratic institutions within the state (Rome started this).

2) The present fractional reserve system (“frac”) is artificial, and rests on the state. This is nothing new. Most of the currency used under Rome had an official value, imposed by the state, much superior to that of the precious metals the coins contained. The Tang dynasty in China, in the seventh century used paper money, with a value also imposed by the state (in both cases the cause was the dearth of precious metals).

I propose to use Absolute Worth Energy as a (much less arbitrary) currency. Anyway,

3) Economics was invented as a concept by Xenophon, a hyper intellectual, part of Socrates’ school. Scholars are getting the notion that much of macroeconomics’ foundations are too uncertain to be anything but a matter of philosophical debate.

See in the New York TimesWhat Is Economics Good For? The authors are philosophy professors, one of them chairperson at Duke university. Extracts:

“A student who graduates with a degree in economics leaves college with a bachelor of‘science’, but possesses nothing so firm as the student of the real world processes of chemistry or even agriculture.

… Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us.

It’s easy to understand why economics might be mistaken for science. It uses quantitative expression in mathematics and the succinct statement of its theories in axioms and derived “theorems,” so economics looks a lot like the models of science we are familiar with from physics. Its approach to economic outcomes — determined from the choices of a large number of “atomic” individuals — recalls the way atomic theory explains chemical reactions. Economics employs partial differential equations like those in a Black-Scholes account of derivatives markets, equations that look remarkably like ones familiar from physics. The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.

…Moreover, many economists don’t seem troubled when they make predictions that go wrong. Readers of Paul Krugman and other like-minded commentators are familiar with their repeated complaints about the refusal of economists to revise their theories in the face of recalcitrant facts…What is economics up to if it isn’t interested enough in predictive success to adjust its theories the way a science does when its predictions go wrong?

Unlike the physical world, the domain of economics includes a wide range of social “constructions” — institutions like markets and objects like currency and stock shares — that even when idealized don’t behave uniformly. They are made up of unrecognized but artificial conventions that people persistently change and even destroy in ways that no social scientist can really anticipate. We can exploit gravity, but we can’t change it or destroy it. No one can say the same for the socially constructed causes and effects of our choices that economics deals with.

…no one can predict the direction of scientific discovery and its technological application. That was Popper’s key insight… scientific paradigm shifts seem to come almost out of nowhere. As the rate of acceleration of innovation increases, the prospects of an economic theory that tames the economy’s most powerful forces must diminish…”

This brings us back to Yosemite’s Rim Fire (I run there all the time, loving the giant trees). Why did that happen? Well, the Forest Service took days to bring the big planes dumping ninety tons of fire retardant at each pass.

Sequestration caused huge cuts in many parts of the Federal Budget of the USA. Including fire fighting (the Forest service was literally running out of money to fight fires, before the Rim Fire, explaining its slow reaction; it had $50 million left for the year, for the whole USA; the Rim Fire will cost several times that!).

And, of course, the most significant victim of sequestration is deep science, the very engine of humanity.

Although the location and nature of revolutionary thinking is hard to predict, it’s easy to predict that, by financing enough students of revolutionary thinking, one will get breakthroughs.

Thanks Richard! I have been taking heavy flak for my will to extermination of various servants of Pluto, so I appreciate the support, all the more!
I just added a few striking facts on the Rim Fire, in the notes at the end, by the way…
PA

Cher Paul: En effet. Tres juste.
The main source of human violence, congenital or cogitated, is too many people in one place, considering available resources and technology.

(Exactly the situation now: Japan uses seven (7) times the resources it can provide itself with. For example.)

That’s why the military angle always dominate, and any left wing/socialist/humanitarian thinking neglecting that most major context is as if spitting facing the breeze: it comes right back.

So it has been. It’s nearly the definition of human beings. Only all encompassing intelligence is deeper than that, and, even then, unavoidably concludes that intelligence is about dominating the environment, thus going back to war. War against other people, bad systems of thought, or against the elements.

Even Islam got that one right (concept of JIHAD), and even Hitler, generally a deep moron, explained that to his subordinates. So it should not be too hard to understand.
PA

Dear Patrice, i feel sorry for the devastation of the forest close to your home and has nothing to add. As contrary to it, to your ideas about economy i have a lot to add and most of rather complementary than contrary.

1. You correctly said macroeconomics is far from being a science in way as the natural sciences are, where most of the predictions are verifiable. Macroeconomics as all the other social “sciences” speak most of the time about tendencies and not necessary outcomes. The Fed’s policy of Quantitative Easing’s aim is to try to increase the aggregate demand in the economy. It’s very partial success was caused by the TENDENCY of the US public since 2008 to decrease their borrowings, and the commercial banks TENDENCIES to keep their liquid money reserves above the required minimum rather in the Fed’s vault than borrowing it. As you can see i used twice the world tendency and not even once the world “the outcome will be”. By the way, if these tendencies would not exist but would be to the opposite direction, the inflation would “PROBABLY” rise its head. I say probably and not for sure, because the production capacities are unemployed. Probably the inflation if appears, it will be caused by the energy and/or other commonality price increase rather than limits of production capacities, that seem to be unlimited.
2. The golden standard money is history, and even more, a false history. The coins never really represented real value even when minted out of pure gold (it can’t be done even technically). Because of scarcity of certain metal the rulers used to mint coins, they needed to limit themselves and this gave credibility to the system. Still inflation existed also before the invention of the paper money.
Since 2008 the US and European governments have overdone with printing money. The trillions of dollars sounds very frightening, yet surprise, no inflation. But what if??? What if the tendencies of the public to save will go again down and the tendencies of the banks to borrow will go up? The answer is the government has many instruments how to influence the monetary liquidity which have bigger impact on money circulation in the economy than the money printing itself. For example the minimum reserve rate requirement from the commercial banks. The problem is, if used these tools, the leading role in the monetary system will be transferred from the commercial banks to the government. But this is already more a political question than a economic question, i just would add that seeing the performances of the banksters in the last years i wouldn’t see it as such a big catastrophe.
3. The external debt of US is much more disturbing. If one day the Chinese would decide to stop to finance the US current deficit, again rather for some political reason than economic reason, it could cause a big shakeup with the world economy. Lets hope this change will be rather gradual than one step act.
4. As to the fraction reserve system. Since the minimum reserve rate requirement went down in the last 40 decades to disturbing low levels, (In England and i think in Australia too, it is “0”), so the system actually transferred the right to print money from governments to the privately owned banks. (The result among others are the unprecedented rewards of the banksters). How and why it happened is a good question and i really don’t have the answer for it. Probably because the governments have done pretty lousy job, while siting on the printing machine.
Now the new Basel regulations try mildly to correct the situation with the new equity requirements. I can’t go into explaining this issue, it is explained in my book;http://rodeneugen.wordpress.com/2013/04/10/1801/

Important to say is, that as result of changing the fraction reserve system will be necessarily return of the role of money printing to the government. Maybe again it is not such a bad idea, but it is rather a political issue than an economic one.

re: 3. The external debt of US is much more disturbing. If one day the Chinese would decide to stop to finance the US current deficit, again rather for some political reason than economic reason, it could cause a big shakeup with the world economy. Lets hope this change will be rather gradual than one step act.

The Chinese own a very small piece of our debt, we could pay them off any time we wish. And if they decided to stop buying Treasuries the Fed could replace them with a keystroke.

Indeed, Richard. I would go even further. I view Chinese lending to the USA as a rent the PRC is paying to be part of the action. So it’s a favor TO THEM, by the USA. It’s a nice entanglement, in a spirit of togetherness, but it does not go further than that.
In particular, it’s of no strategic consequence WHATSOEVER. Quite the opposite; it helps USA finance, hence the USA military.
PA

I would say the reality is much more complicated than this. If the Chinese, or any other net importer will decide to stop to lend to US, It means they have to stop to export to the US all their products. Then if they go even farther and start to sell their Treasury securities, this may have two possible consequences. a. the Fed will not intervene and the Treasury price will go down, it means the interest rate will go up. Not good for economy and employment. b. The Fed will purchase the treasuries. If it happens when the resources are stretched to their limits, it will cause inflation. This will happen exactly at times when the imported merchandise will have to be replaced by local production, this means other pressure on the resources. Conclusion; instability to the US economy.
But what will happen to the Chinese and the World economy? Probably the Chinese will have to re-valuate their currency against the US Dollar, to reduce their surplus in the trade. Otherwise the only way to reduce their export to the US can be done only administratively, this means over regulated economy, and this even the Chinese don’t want. And what about Europe. Europe will on one side enjoy the revaluation of the Chinese Yuan, but on the other side its own import from China will be much more expensive.

I can continue to develop the scenario on and on, but the main thing is that until US lives on borrowed money, the real decision about what will happen in the world economy is in Beijing and not in Washington. If you believe you can trust them, they make always the right decisions, then you can calm down. Probably they are not worse decision makers than the guys in Washington, but……..

Dear Eugen: thanks for the shared sorrow for the giant forest. Today much of California has unbreathable air, with visibility 50 meters. The fire has broken through to the south.

The whole idea of the “FRAC” (my name for the fractional reserve system) is make private individuals, the bankers, the creators of money. This can avoid plutocracy IF & ONLY IF bankers are viewed as AGENTS OF THE STATE (or at least 99% so, through TIGHT REGULATIONS). Obviously not the case now.

Now there is the real economy, the financial economy (banks), the shadow economy (shadow banks, just as big), and the derivative economy (ten times the real one). Chinese lending finances the real economy (hopefully). Should it stop, one could keep the real economy going by having the government just making it so.

Only the real economy matters. It’s a bunch of contracts between actors. With computers, as Richard pointed out, they could be redrawn probably ith just one click of the mouse.

The most important economic problem, in many places on Earth, is whether anti-missile defense is working, up, and running. with crazed psychopaths such as Kim and Assad minutes of missiles flight away, that is the question.
PA

I would like to add to the problem of environmental neglect you mentioned. It is obvious that the market economy and the representative government system has no real tools how to cope with the problem of environmental sustainability, so the leaders do nothing and neglect the issue. The environmental problems are too long term, beyond the time line of any government, even beyond the two term French president term (14 years). Eventually when they will become short term problems, it will be most probably too late. If to look for solution, it has to be out of the existing political economic system, and i don’t see any example of a economic system that really has the formula how to approach this problem (except maybe in Bhutan and some monasteries). What is obvious, the existing capitalistic economic system, driven by need for interest repayments and need to achieve ever growing yields is the worse of all the possible systems to cope with the environmental problems.

Dear Eugen: Agreed. However, as related more or less in J. Diamond’s Collapse, and as I have mentioned many times, the Europeans and Japanese were able to deal with a huge ecological crisis in the 14C.

OK, Europe lost half of its population (at least). However kings were able to take strong ecological measures. In France some mountainous regions were outright prohibited for human occupation (to allow forests to come back, curbing soil erosion).

So if the Middle ages could do it, why not us?

Leaving aside for a moment the fact we are all too led by the nose by armies of plutocrats, and their agents, conscious, or not, it’s because the ecological problem, just like the plutocratic problem is global now, and power is local (answer to the question; why is it that the French republic is bombing all over?)
PA

Dear Patrice, I own you about France. I am not an expert on France, far from it, just read enough to try to figure out what really happened. Learned from the historical disaster of the Versailles agreement, composed by the French Georges Clemenceau, after s WWII they tried something different. France was after the second world war the most beneficial country. While the Germans tried to scrawl out from the rubble and the English sink into economic dis-functionality the French had non of this. Its enough to remember the French creativity in every field after the war. Then the EU was created, and again France came out with the upper hand. And then De-Gaul withdraw from Nato enjoying the US umbrella without to pay for it.

And Paris was again Paris, the cultural capital of the world. What now? Even the French movies are not anymore what they used to be. Where is Depardieu compared to Jean Gabin or Gérard Philipe? Or i don’t know something that is happening in the French culture?

As to the economy it will have to adopt itself if not worse. Its car industry lives on subsidies, (Reno is state owned). Germany is less willing to continue with the “widergutmachen”. They started to be annoyed, when someone mentioned their history. We could see it in the case of Greece.

And the main issue, what that means to be French in these days anyway? All this communities of immigrants, did they ever heard the name of Vercingetorix. Maybe if they read the Asterix and Obelix. Or did they read Zola or Victor Hugo? Am i missing something? I don’t speak French, so maybe a lot is happening and i just don’t know about it.

I believe France is the most militaristic against the fundamental Muslims because the Maghreb is in its courtyard, and not so long ago was part of France. Probably they know something that other European nations don’t. By the way, did you hear stories about the mass murdering of French Algerians when Algeria became independent? I lately saw a mesmerizing documentary about it. If interested i will find for you link.

Dear Eugen: First I can say is that I broached many of these questions before.

The Versailles Treaty was just, magnificent, deep, splendid. misericordious. It created a free Eastern Europe. Those who differ, embrace Hitler.

The crypto-Nazi, plutocratic Lord Keynes disagreed with Versailles. Keynes, a Lord, hated the French REPUBLIC. Lord Keynes gave in 1919 to those who would call themselves the Nazis the sort of garbage talking points about Versailles that has polluted mentalities ever since. I mentioned this many times.

Saying Versailles was bad is saying Poland, Czeckoslovakia, etc, was bad, and, even more importantly, that Auschwitz was good. The Nazis killed 20 millions in extermination camps alone, because of Lord Keynes, at least in part.

I am half African myself, the real thing, not in the sense of Americano-American with a beige color. And I have an essay ready explaining why France has jurisdiction over Syria (I did not put it out, because the usal haters will turn around and accuse me of “colonialism”, whatever that means)
PA

You can send me that link over Algeria. My family lost all its property there, and several lives. All 100% criminal, of course. People who had done good all their lives were rewarded with suffering and death.

As my Algerian born dad discovered Algerian oil and gas, Algeria profits mightily to this day of the good works of my family, which did not see its country again since sometimes in the late 1960s.

So be careful what you say about uncouth “immigrants”! ;-)!

French culture is not Zola or Hugo, just. Zola and Hugo embraced a very deep, multimillennial system of ideas and mood that pervaded the place that became France for at least 45,000 years.

That mood, the mood of those who have seen much, is inclusive, more interested by truth and the good life than slogans and the herd.

Why? Because no less than the two main north-south routes and the one and only Med to Atlantic (s?) route go across France. European geography.
PA

Dear Patrice, the documentary is about massacre of pied noir in Oran, murder of a Algerian Jewish musician, massacre of Italian villagers and interview of women participating in the war of independence. The documentary was made by Jean Pierre Ledan a half French half Algerian. I can’t google his movies in English, probably in French it will be easier. If you have difficulty to find the movies and are still interested, i can find the contact to Mr.Jean Pierre Ledan directly.

About the allegations that eliminating the criminal against humanity in Syria has to do with gas fields:

The Leviathan gas field is a large natural gas field located in the Mediterranean Sea off the coast of Israel. It was discovered in November 2010.

The gas field is located roughly 130 kilometres (81 mi) west of Haifa in waters 1,500 metres (4,900 ft) deep in the Levantine basin, a rich hydrocarbon area in one of the world’s larger offshore gas finds of the past decade. It’s south of the Lebanon-Israel maritime border.

The gas find has the potential to change Israel’s foreign relations towards a closer collaboration with Cyprus and with Greece.

The other fields are either much closer to Israel, or directly south of Cyprus.
PA

The news about Fukushima lately has been a lot worse than many had been hoping for nearly 2 1/2 years after the tsunami flooded the complex of nuclear power stations, scramming reactors, knocking out emergency power, melting 3 reactor cores and causing a loss of coolant at a spent fuel pool located too close to reactors themselves.

According to a nuclear expert in Ottawa, Canada the latest plan of the Japanese government – TEPCO having been deemed not competent to remain in charge of repair efforts – to freeze cooling water to prevent it from further contaminating the ocean, is a very complex undertaking technically and the odds against it succeeding are high given that another earthquake may rupture bolted-together holding tanks which will otherwise probably rapidly experience corrosion damage from the contaminated seawater. Radiation levels are said to be 18 times higher than previously known – another big OOOPS!

It’s not clear how many more big OOOPS these guys will be allowed before a worse outcome than Chernobyl ensues, given that the amount of radiation in the contaminated seawater is said to be double that released when Chernobyl blew up. Let’s hope these guys get their act together – and fast!!! The whole thing sounds like a huge slow-motion train wreck with a very bad ending that may be yet to come.

Dear Jeff:
Yes, well, that’s a problem in this world: one has to get it right. The design and implementation thereof at Fukushima was insane. Not as insane as dumping zillions of tons of CO2 in the atmosphere, though.

Japan has a problem in the sense that most of its nuclear plants were built within easy access of giant tsunamis. The largest tsunamis in Japan in the last two centuries were 100 meters high (yes an unbelievable 300+ feet!).

And the Fukushima plant was not tsunami resistant (in a place where there had been a giant tsunamy 12 centuries earlier!) Some of this could have been remedied in a few days’ work (movable diesel generators). Other plants switched to diesel and were OK.

California shut down the San Onofre nuclear plant, built along the sea, waiting for a tsunami. That was a good idea (shutting it down). Nuclear can be made safe, and increase safety relative to CO2 dumping. But it has to be done tight, and right.

At Fukushima, four reactors went bad after being hit by a 30 meters wave. At Chernobyl, a reactor generating 100,000 Megawatts (!!!!!!!!!!!! About 50 times its safety limit) exploded in a nuclear explosion. It’s hard for me to believe they did not secure yet the radioactive pools they set (idiotically!) next to the reactors…
PA

Fire GDP
How one measures a Great Depression is of the essence. If one measures it by EMPLOYMENT, we are in a Great Depression and stay there. (One ought NOT to measure by GDP, as this can be distorted by the financial sector.)

Right now, thanks to one of the wealthy golden banker boys in Obama’s cabinet, sequestration is in place. It’s devastating many of the sensitive tendrils of the economy of the USA feeling the future, such as deep science.

The Rim Fire still burning in Yosemite is a direct consequence of sequestration: not only prevention had been stopped by lack of funding (no prescribed burns in winter), but, when the fire started, the US Forest Service had only 50 million dollars for the rest of the year, for the whole USA. So the planes were not sent, for several days during which the fire exploded.

Finally the planes were sent and cities saved. The cost of the fire is now approaching 100 million dollars, just for the Forest Service. And let’s not talk about the climate consequences of what is the largest fire in Californian history, in term of volume of wood burned! It’s expected that, due to the heat of combustion that vitrified the ground, and the drought, much of the forest will not regrow.https://patriceayme.wordpress.com/2013/08/30/real-economics/

Surely you are joking? http://www.treasury.gov/Pages/default.aspx
U.S. Department of the Treasuryhttp://www.treasury.gov
view auctions. find a form. get tax information at IRS.gov. see interest rate da…ta. switch to electronic benefits. find currency and coin information. report a suspicious email or suspected fraud view Budget and Performance reports. have a lost or expired check reissued

This is one of the more malignant forms of Japanese-style corruption. Problems fester as they are ignored, denied, swept under the rug. Until one day they blow up, leaving a wide arc of destruction. This form of corruption is better known as denial. It’s easier to change the design of a power plant than to change the culture that allows dangerous design defects to persist merely so the people in charge can engage in denial, but unless the people making the decisions can be made to become more responsible, nothing changes. There’s a saying in Japan which roughly translates as “The nail that sticks up will get beaten down.” Fine when it’s only a nail you could trip over but disastrous when it’s a nuclear power plant and a whistle blower will be ignored, fired or worse.

There’s no doubt the Japanese people must be very angry at some of their decision makers, but it remains to be seen if they will be cashiered and replaced with more responsible people. Meanwhile, the government has a very expensive and technically difficult mess to clean up, this the envy of no one.

Tragic, too that the Japan, having suffered Hiroshima and Nagasaki because its leaders were seduced by fascism is suffering again because of its leaders’ arrogance that nuclear technology could be harnessed without stringent oversight and redundant safety measures. They failed to recognize that clustering so many reactors together along with the spent fuel pool posed much greater risks than they imagined. The myth that their regulatory regime had everything under control has been exploded, but only at a terrible price.

A reenactment of the Chernobyl disaster has played repeatedly on German TV over the past several years, witnessing an argument between control room operators over how to conduct the reactor test, wherein they did just the opposite of what would have been sensible to do based on the reactor’s design, triggering the explosion.